Last year, fixed income exchange traded funds accounted for nearly a third of all ETF inflows. With the Federal Reserve having raised interest rates four times, many of 2018's most popular bond ETFs were short-term bond funds.
A new fixed income ETF eschews short-term in favor of longer duration fare.
What Happened
The actively managed First Trust Long Duration Opportunities ETF LGOV debuted Wednesday and is the second new fixed income ETF launched by Illinois-based First Trust this year.
LGOV's “primary investment objective is to generate current income with a focus on preservation of capital. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in a portfolio of investment-grade debt securities issued or guaranteed by the U.S. government, its agencies or government-sponsored entities, including publicly-issued U.S. Treasury securities and mortgage-related securities,” according to First Trust.
Why It's Important
LGOV comes to market amid diminishing expectations that the Federal Reserve will tighten rates this year at a pace comparable to 2018's. Some fixed income market observers believe it's possible the Fed doesn't hike rates at all this. If proven accurate, that forecast could help investors renew their taste for higher-yielding, long duration bond ETFs.
The new ETF could emphasize mortgage-backed securities as an avenue for reducing investors' exposure to bond equity volatility.
“The portfolio managers believe mortgage-backed securities (MBS) are an important piece of a diversified portfolio due to their low correlation to other core asset classes and positive credit quality trend,” said First Trust in a statement.
LGOV's management team considers global macroeconomic factors, broad fixed income trends and valuations across various MBS segments, among other factors, when considering additions to the fund.
What's Next
The new ETF charges 0.65 percent per year, or $65 on a $10,000 investment.
Earlier this month, First Trust introduced the First Trust Low Duration Strategic Focus ETF LDSF, an actively managed, low duration fund.
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